Defense Wins Audits: How NIL Athletes Can Substantiate Business Expenses

Why Recordkeeping Matters for NIL Athlete Business Expenses

Name, Image, and Likeness (“NIL”) has transformed college athletics into a significant commercial marketplace. Athletes such as Angel Reese have demonstrated that a college athlete’s name, image, and likeness can support major endorsement and sponsorship opportunities. With that earning potential, however, comes a less glamorous issue: determining which expenses associated with building and maintaining an athlete’s brand are deductible.

Under Section 162 of the Internal Revenue Code (“IRC”), taxpayers may deduct all ordinary and necessary business expenses.[1] These deductions are subject to limitations on personal expenses under IRC Section 262 and hobby loss rules under IRC Section 183.[2]

NIL athletes, such as Livvy Dunne, who earn compensation from endorsements, sponsorships, social media posts, and similar activities, are generally treated as self-employed individuals for tax purposes.[3] As self-employed individuals, NIL athletes may deduct all ordinary and necessary business expenses. Deductible expenses often include agent and professional fees, marketing and promotional costs, equipment, and travel.

While expenses may fall within the acceptable ordinary and necessary category, there must be adequate substantiation of records to establish the amount, nature, and business purpose of the expense. Taxpayers are required to maintain adequate records to determine their correct liability pursuant to IRC Section 6001.[4] Certain expenses related to travel, meals, gifts, and other expenses are subject to strict substantiation requirements described in IRC Section 274(d).[5]

For athletes, these requirements are especially important because many of their expenses serve both personal and professional purposes. For instance, costs related to training, travel, clothing, and equipment may support their professional or NIL activities, but can also offer personal benefits.

Caselaw demonstrates that even where an expense may otherwise qualify as ordinary and necessary, inadequate records can prove fatal to the deduction.

Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Consult an experienced attorney regarding your specific NIL activities, business expenses, and tax circumstances.

Reed v. Commissioner (2026): Payment Alone Does Not Establish Deductibility

In Reed v. Commissioner , the Tax Court considered whether taxpayers were entitled to various deductions and whether they had underreported income from several business and investment activities.[6] The taxpayers consisted of a married couple, Scott Reed and Dr. Stacy Reed, who operated Reed Realty Advisors (“Reed Realty”), a real estate consulting and development firm. Dr. Reed, a medical doctor, started her own practice called Reed Dermatology Northwest. During the examined period, Reed Realty engaged in multiple real estate development projects in Arkansas and Alabama. Although Reed Realty maintained its own bank account, Mr. Reed often used the taxpayers’ personal bank accounts for deposits, withdrawals, and payments to third parties. He classified these payments as business expenses. Additionally, the taxpayers failed to provide complete books and records for Reed Realty.

The case involved numerous disputed items, including unreported business receipts, rental income, partnership interest income, capital gains, and significant business expense deductions. Notably, the taxpayers claimed substantial deductions for payments made to third parties and for approximately $811,000 transferred from their personal accounts to separate real estate project entities.

The Tax Court examined expenses related to construction, repair, and landscaping for several real estate project entities. The record showed that Mr. Reed personally paid these costs using funds from the taxpayers’ accounts. However, the evidence also indicated that these expenses are related to development projects owned and operated by separate limited liability companies, not Reed Realty. The parties agreed that these construction costs were the responsibility of the project LLCs, not Reed Realty. Therefore, although Mr. Reed initially paid or advanced the expenses, he paid on behalf of separate legal entities with their own tax obligations.

The Tax Court allowed some deductions where the taxpayers established a sufficient connection between the payment and Reed Realty’s real estate business. For example, the Court approved expenses paid to land use consultants, engineering firms, legal advisors, and other professionals because the evidence demonstrated that these services were ordinary and necessary to Reed Realty’s trade or business.

However, the Tax Court disallowed several other categories of expenses. It rejected certain payments related to Dr. Reed’s dermatology practice because the taxpayers did not establish a connection between those expenses and Reed Realty’s real estate business. The Court also disallowed various unexplained payments where the taxpayers did not provide sufficient evidence of their purpose.

Reed highlights an important distinction between payment and deductibility, as well as between reported transactions and substantiated tax consequences. A receipt or bank record may show that the taxpayer spent money, but that evidence alone does not prove the payment is deductible. Similarly, reporting a sale of a partnership or business interest as resulting in no gain or loss remains incomplete without credible evidence of basis and proper computation of the amount realized. The taxpayer must prove the nature of the transaction, its tax consequences, and the necessary supporting documentation to sustain the reported figures.

Ericson v. Commissioner (2016): A Legitimate Business Still Needs Records

In Ericson v. Commissioner , the Tax Court addressed whether taxpayers were entitled to deduct substantial expenses associated with their sole proprietorships.[7] The taxpayers operated several activities, including tax preparation, photography, jewelry sales, and merchandise sales. Although the Tax Court did not question whether the taxpayers operated legitimate businesses, they did not maintain formal books and failed to retain receipts supporting many claimed expenses. Instead, Mr. Ericson periodically reviewed bank and credit card statements, characterizing transactions as either business or personal.

The Tax Court confirmed that taxpayers must prove their right to deductions, including the specific amount and business purpose of each expense. It also clarified that certain costs, such as travel and vehicle expenses, must meet stricter documentation standards under Section 274(d).

Despite acknowledging that they operated legitimate businesses and likely incurred deductible expenses, the Tax Court disallowed $92,564 in claimed sole proprietorship expenses for 2008 because they failed to provide sufficient evidence supporting the deductions.

Ericson demonstrates that operating a legitimate business alone does not establish entitlement to every claimed expense. Taxpayers must maintain records that show not only that an expenditure occurred but also its amount and its relationship to the business.

Stemkowski v. Commissioner (1982): When Athletic Expenses May Be Personal

In Stemkowski v. Commissioner , the Second Circuit opined on the deductibility of various expenses claimed by Peter Stemkowski, a Canadian citizen who played professional hockey for the New York Rangers.[8] The case centered on whether Stemkowski could deduct off-season conditioning expenses and other costs he claimed were ordinary and necessary for his professional hockey career.

Stemkowski claimed deductions for various off-season activities, including golf, bowling, tennis, running, swimming, and health club memberships. The Tax Court initially disallowed the conditioning expenses, arguing they were only related to his obligation to report to training camp in good physical condition and thus connected to income earned in Canada rather than the United States. However, the Second Circuit rejected this reasoning, concluding that off-season conditioning also helps Stemkowski stay fit during the NHL season.

However, the Second Circuit did not rule that all of Stemkowski’s conditioning expenses were deductible. The Court remanded the case to the Tax Court to decide which expenses qualify as ordinary and necessary business expenses under IRC Section 162 , and which are personal expenses under IRC Section 262. The Court noted that activities like weightlifting, jogging, and bicycling may be more related to business because they directly improve athletic performance. In contrast, golf, tennis, squash, and bowling may be more personal and recreational, especially when the taxpayer engages in these activities for enjoyment or relaxation.

Prepare Before the IRS Challenges NIL Business Deductions

The NIL landscape has created business opportunities for athletes that would have been difficult to imagine only a few years ago. Athletes such as Angel Reese and Livvy Dunne illustrate the range of ways an athlete’s name, image, likeness, athletic performance, social media presence, and personal brand can generate income.

The tax rules governing the expenses associated with those activities, however, remain grounded in familiar principles. A taxpayer must establish that an expense is ordinary and necessary to the trade or business, distinguish business expenditures from personal expenses, and maintain sufficient records supporting the amount and business purpose of the deduction.

These cases demonstrate that the existence of a business relationship or even the potential deductibility of an expense does not end the analysis. The taxpayer must still be able to prove the deduction. For athletes, that may mean maintaining contracts, receipts, travel records, mileage logs, invoices, and contemporaneous notes explaining how an expense relates to a particular endorsement, appearance, sponsorship, or other income-producing activity.

As NIL opportunities continue to expand, athletes should approach recordkeeping with the same discipline they bring to competition. Defense wins audits, but that defense is built before game day with contracts, receipts, logs, and records that can substantiate deductions when the IRS challenges the play.

Speak With a Tax Attorney About an NIL Expense Audit

If the IRS has questioned NIL business deductions or requested documentation supporting an athlete’s expenses, experienced IRS audit guidance can help evaluate the records, identify potential substantiation issues, and develop an appropriate response.

The Wilson Firm represents individuals and businesses in IRS examinations, tax disputes, and litigation involving business deductions and other federal tax controversies.

Contact The Wilson Firm to discuss the audit and the available response options.